Sources Of Finance Available To A Business

Identification and screened of Opportunity of Musico

Discuss about the Sources of Finance Available to a Business.

The form of art, a reflection of emotions or feelings by harmonic frequencies is known as Music (Greenberg, 2016). Music is considered as a way of entertainment that keeps sounds together in a form which is liked by people, they find it interesting and dance to. Most of the music contains people singing or playing musical equipment, such as drums, guitar, violin, or piano (Music Files, 2018). The above report is about a new business venture named as Musico. The aim of Musico is to resolve the music listener’s problem by offering the combined playlists from various music platforms under one single platform and offering them the access to music from various sources across the world. The report is being prepared in order to identify that how the opportunity of Musico is screened or recognized. Along with this, it will help in identifying the key features that can result in early breakeven point and those features that could simply delay it. Further, the report will provide the detail of venture’s financing necessities containing both debt and equity, and the basis of the funds. After this the evaluation of challenges of fast growth will be analyzed and how it can be overcome. Two options for harvesting will be accessed.

Market opportunity can be said as a chance to fulfill the need of the market, want or interest by an inventive mixture of resources and supply higher values. Identification of opportunity is a pivotal job in entrepreneurship. It is considered as an ability that each entrepreneur should have for using new businesses endeavours (Smallb, 2018).

The ability of people to think contrarily, feel differently and perform differently depending on the experiences they have received throughout their lives (Chehtman, 2017). These variances are serious and vital in the opportunity identification process. The skill of the entrepreneur to think creative is the key element in identifying the new and innovative business idea i.e. Musico. Along with this, the presence of variation in the thinking ability is the reason for this new business idea. The real pain point has been identified in the market of music by the entrepreneur and therefore able to make this business plan.

Entrepreneurs who classify the problems, needs, and wants of the society can identify the potentials for new products and procedures (Wijeya, 2012). The business idea i.e. Musico was identified in order to give the solution for the problems in today’s music services. The problem is that there is no availability of single platform in the market by which people can enjoy their favorite music. Customers are bound to select among many streaming services because every music platform does not have all the music that people prefer to listen. Along with this, there is another problem that people are not able to listen to music continuously by using different applications on their mobile devices. There are businesses in the market like Pandorra and Spotify which allow using another app while listening to music; however, listeners have to subscribe to more than one platform for listening to the music.

The ability to think different

It is very important for the success of any business to understand the needs and wants of the customers in the market. Musico identifies that in the market of music there is the demand for single music platform and due to which there will be no need to subscribe various music platforms. Therefore, Musico decided to grab this opportunity and make flowing of music simple for the listeners. The aim is to syndicate the playlists that the customers have in different streaming services, under one platform and wanted to offer the user an easy and seamless all in one app so that they can listen to all their favorite music.

Break-even analysis is considered as one of the popular tools of business which is used by every company in order to define the profitability level. It offers companies a standard target which helps companies to cover the costs and make some profit (Cafferky, 2010).

The break-even point explains the conditions of a business in which the revenue and the cost involved in running the business becomes equal. This situation is also called as a no profit and no loss condition. It is very important to identify this point while determining the finances for a new venture or in revising the growth of an existing business (Christine, 2015). There are various elements that contribute to the company’s break-even point.

Basically breakeven is defined by two factors — expected revenue and costs of projects of operating business (Hallam , 2011). Revenue is majorly affected by the demand of the market. As much as the demand of the customers for product or service will increase it will results in the increased sales volume and sooner the cost of the business can be covered. The individuality of the business, size of the probable target customer and efficiency of the advertising methods all has an impact on the demand volume (Snyder, 2014).

The relative costs of commencing a business have a great impact on the break-even point. A business that needs only $10,000 to commence has a far enhanced opportunity to touch the breakeven point earlier rather than the business that costs $50,000 to commence. If the net profit for the quarter is estimated at $5,000 then it will take approx. two quarters to attain the breakeven point in the first scenario, however, it will take about more than two years to attain the breakeven point in the second scenario.

Fixed and Variable costs are the continuing costs consist of the functioning of the business. Variable costs contain costs directly linked to the product. Fixed costs are those things like utilities and building charge that is being paid irrespective of the production. Breakeven can be delayed with high overhead. If a business has high variable costs it means it has to sell a high volume of services or goods in order to earn a more gross profit and can cover the fixed costs (Kokemullar, 2018).

The pricing strategy of the company has major involvement in the break-even timelines. High-end suppliers regularly vend products at major markups on variable costs. This helps in making the high gross profit. The meaning of high gross profit is that business can earn extra profit from every sale in order to cover the start-up and fixed costs. Providers of Low-cost often have trimmer gross profit margins which mean that they need to trade many more services or goods, often demanding extra time, to eventually attain the breakeven point (Martin, 2014).

Understanding the problems of the customers

Financing is required in order to commence a business and to increase the level of profitability (Alhabeeb, 2014). There are various sources to be given importance at the time of identifying start-up financing. However, before this business needs to identify the amount of money needed and at what time it will be needed.

The financial requirements of a business differ on the basis of size and type of the business. For instance, processing businesses commonly consider the capital, demanding a huge amount of capital. Business like retail normally needs less capital (Global Entrepreneurship Institute, 2018).

The meaning of Equity ?nancing is exchanging of an ownership portion of the business for the financial investment. The stake of ownership related to an equity investment permits the stockholder to have a share in the profit of the company. Equity includes an everlasting investment in a business or company and is not refunded by the business at a later date. There should be a proper description of the investment in the officially formed business entity (Senssfelder, 2007). A stake of equity in a business that might be able to be in the way of membership unit, as in the matter of a company with limited liability or it can be in the way of general or preferred stock as in a company (Bossert, 2008).

Musico can launch diverse classes of stock in order to have a control on the rights of voting between the shareholders. Correspondingly, it might be able to use diverse sorts of preferred stock. For instance, common stockholders have right to vote whereas preferred stockholders usually cannot vote. On the other side, common stockholders are placed at the last in the line for the company’s asset in the matter of bankruptcy or default. As the name reflects preferred stockholders get the preference in receiving the predetermined dividend before other shareholders get a dividend.

Debt ?nancing contains borrowing funds from the creditors with the clause of repaying the funds which are borrowed along with the amount of interest at a pre-decided time period (Bragg, 2011). In the matter of creditors (those offering the funds to the business), he/she receive interest on the amount which was offered to the borrower. These financing might be secured or unsecured. Secured debt includes security (a valued asset which the creditor can attach in order to satisfy the loan in the matter of non-payment by the debtor or borrower) (Eggert, 2014). On the other hand, debts which are unsecured does not include any type of security and keep the creditor in the least secure position in the matter of receiving the payment in the default case.

Debt ?nancing (loans) can be long term or short term in their schedules of repayment. Usually, long-term debt is used for the financing of assets like equipment and buildings whereas short-term debt is used for the financing of current activities like processes (Thomsett, 2014). The Musico can arrange debt funds from the sources such as banks and other commercial lenders, bonds, friends and relatives, government programs, commercial finance companies, etc.

Understanding the wants and needs of the customers

Sources of funds from which Musico can borrow funds are divided into three categories based on the time period:

The meaning of long-term financing is the requirement of the capital for a time period of more than 5 years to 10, and 20 years or it can be more according to other factors. The long-term financing sources are used for the Capital expenditures funding in order to purchase fixed assets like land and building, machinery and plant etc. Along with this, the working capital is also financed with the long-term financing source (Hofstrand, 2013). The form of sources of Long-term financing can be any of them:

• Preference shares or Preference capital
• Venture Funding
• Equity share or Share capital (Sheahan, 2018).
• International funding by the method of foreign currency loans, GDR, Euro Issue, ADR, etc.
• Internal Accruals or Retained Earnings
• Term loans from Commercial banks, Government and Financial Institutes.
• Asset Securitization
• Bonds/ Debentures

The Medium-term financing refers to the financing for a time period of 3-5 years and is utilized generally for 2 motives. One is at the time when long-term capital is not obtainable for the time being and second is when deferred revenue expenditures occur such as advertisements. The form of Medium-term financing sources can be one of them:

• Medium Term Loans from Commercial Banks, Government, and Financial Institutes.
• Hire Purchase Finance
• Preference shares and Preference capital
• Lease finance
• Bonds/ Debentures

Short term financing refers to the financing for a time period of not more than 1 year. The short-term finance is needed in order to raise the fund of the business’s current assets such as debtors, bank balance and cash balance, an inventory of finished goods and raw material, etc. it is also termed as working capital financing. The forms of Short-term finances are:

• Fixed Deposit for a period of 1 year or less
• Creditors
• Bill Discounting
• Advances received from customers
• Short term loans like Working capital loans form commercial banks
• Payables
• Trade Credit
• Factory services etc.

As per the Ownership and Control

Sources of finances are also divided as per the ownership and control of the business. They are:

The owned capital is known as equity capital. It is gained from the company’s promoters or from the public by allotting new equity shares. The business is started by the promoters by carrying the mandatory capital for commencing the business. The sources of owned capital are:

• Retained Earnings
• Equity Capital
• Venture Fund or Private Equity
• Preference Capital
• Convertible Debentures

The capital which is arranged from the sources outside the business is known as Borrowed or debt capital. These types of sources of debt financing involve Public in case of Debentures, Financial Institutes, and Commercial banks.

As per the sources of generation

The internal source of capital means the capital arranged from the inside sources of the business. These types of sources include Sale of assets, Decrease or monitoring of working capital, and Retained profits.

An external financing source is a capital arranged from the outside sources of the business. Apart from the sources of internal finance, each source is included in the external financing sources.

Musico Company should maintain a standard ration between its equity and debt i.e. 2:1. In this, the company should try to maintain major part of equity and less part of debt as reflected by the ratio. If the proportion of debt is higher than the company might face the burden of high interest which can increase the pressure on a new venture to generate more and more profit. 

Basis	Debt	Equity
Definition	Something which is owed to some other person such as service, property, and money is known as Debt (Diffen, 2018).	Equity is considered as the value of shares that company issue (Sulfia, 2015).
Uses	Debt is used by the company in order to buy assets which are expensive and the company is presently not able to pay for it (Williamson, 2015).	Equity is used for anticipating the possible profits in any transaction of the asset and it helps in increasing the purchasing power.
Types	The loan, secured/unsecured, bond, private/public.	Revenue gained capital and contributed capital.
Calculation	Amount owned – asset value	Asset value – Debt

Employees are said to be the life force of the business. They are the one who determines the service quality and due to this business should hire the best and brightest people in the organization (Loridwagoner, 2014).

Elements responsible for Early Break Even Point and its Delay

As Musico will expand it will require more and more people on board. But it can hire a maximum number of people at one go. Searching for the right person at the correct time is very time-consuming, but if a company wants good people then it has to give their time. (Even major companies take time in order to occupy their vacancy positions with the best and skilled people).

If Musico wants best people then it has to become the best employer for them. The company needs to design best work policies that can attract the potential employees. A flexible working environment must be given to the employees if it can help them in giving maximum productivity. Be substantial with compensation (as a fast-growing business it cannot give any type of excuses). Else even if the business will appoint right people it has to face trouble in retaining them. Satisfied and happy employees are very important for the long-term health of every business. 

Faltering customer service or interruptions in the results of delivery is knotted to overburdening the company’s employees. If company notice the rise in the number of customer complaints that it is a sign of a big problem.

Solution

If the business failed in an order then it should inform the client about the problem. It will help the company in improving its image in front of the customer besides not delivering the product or compromising the quality will affect. The quality which is delivered shows the credibility of the business, which is considered as the business’s precious currency.

Many times it happens that company is continuously hiring people but it does not have much space to place the new staff.

Business should search for the new commercial property in order to accommodate the new employees. But management of the company should be smart enough they should properly inspect the new commercial place it should have a place to accommodate the people.

A business plan which is used for decreasing or eliminating investment from a specific product, a line of business or brand is known as harvesting strategy. A harvesting strategy usually works when a brand or product line has touched cash cow phase, the maturity phase of the product beyond which a brand or product is improbable to display any major sales growth from constant investments in marketing and sales. 

Musico Company can initiate its partnership with major streaming services company and ask them to disinvest their amount from other product and invest in Musico Company. It is an innovative and profit making idea which can help them in earning more profit in the market.

Watching cricket is an all-time entertainment activity for every person therefore just offering one service that is of music to the customer is not enough for Musico. It can also offer other services such as watching cricket and listening music on one single platform will be considered as a value-added service for the customers of the company.

It can be suggested that Musico should go for partnership with its key partners such as streaming Services Companies and influence them to invest in the idea of Musico. As it will increase the amount of capital of new venture and key partners will get profit due to new and productive business idea. 

Market demand

Conclusion

A new business venture is very important for the growth of any nation as it helps in fulfilling the financial needs of the country. Along with this skills and talent of the entrepreneur is used in the correct direction or area. The above report has explained about a new venture i.e. Musico in which it has highlighted the aspects responsible for the identification of this new business. It has also explained the important points which are responsible for early break-even point and for its delay. Along with the report has explained the financial requirements of the new business venture i.e. Musico in this it has provided the detail explanation of the debt finances, equity finances, and their comparison. It can be suggested from the above comparison that Musico should maintain 2:1 ratio of its equity and debt. Other sources of funds such as funds on the basis of ownership and generation are also presented in the above report. Further, the report has explained some challenges of fast growing business and how it can be tackled. In the end, it has explained about the harvesting strategy and two options for applying harvesting strategy in the business.

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